INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP88-00798R000200180005-8
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 39
• Document Creation Date: December 27, 2016
• Document Release Date: April 7, 2011
• Sequence Number: 5
• Publication Date: January 3, 1986
• Content Type: REPORT

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Directorate of
International
Economic & Energy
Weekly F-
DI IEEW 86-00/
3 January 1986
Copy 6 9 8
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Secret
International
Economic & Energy Weekly
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3 January 1986
iii Synopsis
1 Perspective-Debt-Troubled LDCs and the Challenge of Economic Reform
3
Poor Brazilian Coffee Crop: A
Blessing for Latin American Coffee Exporters
7
Uruguay: Dim Prospec
ts for Economic Recovery 25X1
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13 Venture Capital: Heightened Foreign Interest 25X1
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19 French Fighter Exports: Limited Prospects 25X1
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Energy
International Finance
Global and Regional Developments
National Developments
Comments and queries regarding this publication are welcome. They may be
directed to Directorate of Intelligence
Secret
DI IEEW 86-001
3 January 1986
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Secret
International
Economic & Energy Weekly
Synopsis
1 Perspective-Debt-Troubled LDCs and the Challenge of Economic Reform
Prescriptions from international organizations and private creditors and their
governments advocate extensive economic reform as part of the answer to
restoring the financial viability of debt-troubled LDCs. While most debtor
governments are beginning to realize that some fundamental economic policy
changes are necessary, domestic political realities probably will inhibit effec-
tive implementation.
3 Poor Brazilian Coffee Crop: A Blessing for Latin American Coffee Exporters
Brazil's current coffee crop-now experiencing an extended drought-could
be half the past year's harvest. The international coffee market has reacted
with a surge in coffee futures prices of more than 80 percent since September.
7 Uruguay: Dim Prospects for Economic Recovery
Julio Sanguinetti, Uruguay's President since March, is counting on further
liberalization of the basically free market economy to ease foreign debt
difficulties as well as address popular demands for economic improvement. In
our judgment, domestic pressure and weakening exports will endanger compli-
ance with the IMF program and threaten the overall financial rescue package.
13 Venture Capital: Heightened Foreign Interest
Foreign governments and industry, captured by the successful US example,
are looking to venture capital to facilitate innovation. Despite government and
industry efforts to promote venture capital, many barriers will continue to
inhibit the development of robust markets abroad.
19 French Fighter Exports: Limited Prospects
France continues to lose export customers for its jet fighter aircraft. Declining
sales are likely to weaken the financial condition of France's military aircraft
industry, increase procurement costs for the French air force, and probably
reduce the number of fighters France can buy for its own forces.
Secret
DI IEEW 86-001
3 January 1986
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 International
Economic & Energy Weekly
3 January 1986
Perspective Debt-Troubled LDCs and the Challenge of Economic Reform
Prescriptions from international organizations and private creditors and their
governments advocate extensive economic reform as part of the answer to
restoring the financial viability of debt-troubled LDCs. In most of these
countries, the reforms being encouraged would mean a drastic redirection of
economic and development policies now in place, which are largely character-
ized by massive state intervention in trade, production, and pricing.
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The reforms being recommended would include:
? Dismantling significant tariff and nontariff barriers and export disincentives.
? Selling off large inefficient parastatals or state-owned companies, including
those operating in industries considered key to the national interest, such as
oil and minerals.
? Adopting realistic exchange rate policies to alleviate the chronic overvalu-
ations of debtor currencies.
These reforms are intended, in turn, to restore financial viability by improving
external balances, restoring economic growth, and inducing inflows of volun-
tary financing.
We believe that governments would have to demonstrate a sustained commit-
ment to structural reforms-for at least 12 to 18 months-before domestic and
foreign businessmen would begin to invest or voluntarily lend. In the short run,
however, we believe governments' commitments to economic reform are likely
to waver, in part, because many of the suggested economic adjustments will
cause temporary dislocations. For example, dismantling tariffs would reduce
government revenues-in Argentina these taxes account for 20 percent of
government receipts. Additionally, streamlining and/or privatizing public-
sector firms is likely to temporarily increase unemployment, while currency
devaluations will raise price levels. Many of these countries-such as Mexico
and Argentina-have implemented adjustment programs in the past with
great fanfare only to drift away from their commitments a few months later.
In this environment of short-term costs and long-term benefits, we believe
implementation and continued acceptance of market-oriented reforms will be
difficult-especially in Latin America-because they run counter to the
historical economic thought and deep-seated social and political values of the
Secret
DI IEEW 86-001
3 January 1986
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According to many academic studies, a large segment of Latin society believes
that a broad government role in the economy continues to be essential to
ensuring that development reaches all levels of society. The Latin American
political culture also regards the government as the protector of special
interests such as labor and local business. In a climate of greater privatization
and foreign presence, the power of these groups would be threatened.
While most debtor governments are beginning to realize that some fundamen-
tal economic changes are necessary, domestic political realities probably will
inhibit effective implementation. Many of these countries-especially the new
Latin American democracies-are grappling with how to build a national
consensus on economic development policy and how to maintain their demo-
cratic governments. They will, in particular, be looking for a quid pro quo-
open markets, financing, and stimulative policies in the industrialized econo-
mies-for any Western-initiated policy changes they make.
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Poor Brazilian Coffee Crop:
A Blessing for Latin American
Coffee Exporters
mined.
Brazil's current coffee crop-now experiencing an
extended drought-could be half the past year's
harvest. The international coffee market has react-
ed with a surge in coffee futures prices of 80
percent since September. Because of the price
surge, the International Coffee Organization (ICO)
quota release mechanism has placed 5 million bags
on the market since October in an attempt to
stabilize prices. With prices still trending upward,
quotas are likely to be suspended entirely next
month. As a result of these events, Latin American
coffee export earnings in 1986 could jump by
nearly 50 percent to about $10 billion, with Colom-
bia and Central American countries the biggest
gainers. Even Brazil will gain by the increased
price of its exports, which should more than offset
possible volume reductions. If, however, the ICO
fails to adequately temper the price increases and
facilitate an orderly flow of coffee supplies, con-
suming country members of the ICO, including the
United States, may withdraw from the organiza-
tion. Although such a pullout currently would have
little impact, the ability of the ICO to support
minimum prices in the future would be under-
Effects of the Drought
An extended drought in Brazil's key producing
states of Parana, Sao Paulo, and Minas Gerais-
which produce almost three-fourths of Brazil's total
production and almost all of its finest quality
arabica coffee-is sending shock waves through the
global coffee market. Trade analysts estimate that
the effected crop, due to be harvested next April
through August, could be as low as 15 million bags.
This compares with the excellent 1985/86 market-
ing year crop of 33 million bags, which accounted
for one-third of global production. While Brazil has
sufficient physical supplies of coffee to meet its
domestic consumption needs of 9 million bags and
its export commitments of almost 19 million bags,
it appears unable to satisfy foreign demand for
quality arabica coffee. As a result, prices have risen
above $2.40 per pound, an 80-percent increase
since September.
Supplies from other members of the ICO should
partially offset the Brazilian shortage. In recent
weeks, the ICO's composite price indicator-based
on a basket of coffee types with varying quality and
price differences-has exceeded the $1.20 to 1.40
a-pound price range, which resulted in the release
of 5 million bags in export quotas. If the price
remains above $1.50 per pound for 45 consecutive
market days-as many analysts predict-quotas
will be suspended altogether on 19 February.
Earnings Impact On
Latin American Producers
If prices remain high, Latin America coffee export
earnings could jump by nearly 50 percent to about
$10 billion:
? Colombia-the world's second-largest produc-
er-could earn at least $2.5 billion in 1986 from
coffee exports, up almost one-half from estimated
1985 revenues. Bogota depends on coffee for over
one-half of its total annual foreign exchange
earnings and should be able to unload its costly
stocks-currently the world's largest and equal to
over one year's production.
? Even in Brazil the earnings benefit from the
upsurge in prices is expected to be substantial and
more than offset possible volume reductions. Ac-
cording to recent US Embassy reporting, coffee
earnings could total a record $3.4 billion this
year, up 25 percent from estimated 1985 export
Secret
DI IEEW 86-001
3 January 1986
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Year a Brazil Colombia Other Total Total Latin America
Latin Latin World as Percent of
America America Total World
1978/79
20.0
12.6
19.7
52.3
78.9
66.3
1979/80
22.0
12.7
19.6
54.3
81.9
66.3
1980/81
21.5
13.5
20.1
55.1
86.3
63.8
1981/82
33.0
14.3
1.9.7
67.0
98.1
68.3
1982/83
17.8
13.3
21.9
53.0
83.3
63.6
1983/84
30.0
13.0
20.0
63.0
90.4
69.7
1984/85
27.0
11.0
20.8
58.8
90.4
65.0
a International coffee marketing year October-September.
b USDA forecast.
Latin America: Value of Billion US $
Coffee Exports, 1975-86
Year Brazil a Colombia Central Other b Total
America
1975
0.94
0.68
0.57
0.40
2.59
1976
2.40
0.98
1.01
0.83
5.22
1977
2.63
1.53
1.83
1.11
7.10
1978
2.30
1.99
1.79
1.04
7.12
1979
2.33
2.02
1.79
1.32
7.46
1980
2.77
2.38
1.71
0.91
7.77
1981
1.76
1.46
1.31
0.73
5.26
1982
2.13
1.58
1.28
0.79
5.78
1983
2.32
1.54
1.29
0.98
6.13
1984
2.85
1.80
1.33
0.97
6.95
1985
2.70
1.70
1.35
1.00
6.75
1986 c
3.40
2.50
2.30
1.70
9.90
a Includes soluble and roasted coffee exports for Brazil only.
b Mexico, Dominican Republic, Haiti, Jamaica, Trinidad and
Tobago, Bolivia, Ecuador, Paraguay, Peru, and Venezuela.
c Estimated.
The other major gainers from the upturn in prices
and likely suspension of ICO export quotas would
be El Salvador, Guatemala, Costa Rica, and Hon-
duras. Until the price boom, these countries invari-
ably were forced to market their nonquota surplus
production to nonmembers of the ICO at discount
prices. All of these countries produce good quality
arabica coffees and their economies depend on
coffee for one-fourth or more of their total annual
export earnings. Earnings for Central America
could total $2.3 billion in 1986, as compared with
an annual average of $1.3 billion for 1982-84.
International Coffee Agreement (ICA)
Being Tested
The sharp rise in coffee prices also will put the
price stabilization mechanisms of the ICA to the
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Secret
Importance of Coffee Trade to Latin America
their global coffee sales.
Despite export diversification, coffee continues to
be the most important agricultural export item and
represents the economic backbone of many Latin
American countries. For 1980-82, coffee represent-
ed one-fifth or more of total export earnings in El
Salvador (60 percent), Colombia (54 percent), Nica-
ragua (35 percent), Haiti (26 percent), Guatemala
(26 percent), Honduras (24 percent), and Costa
Rica (24 percent). The largest traditional single
market for this coffee-and the world's single
largest coffee consumer-is the United States.
Annually the United States imports over one-half
of the region's total exports and for some countries
the United States accounts for over two-thirds of
servicing debt obligations.
The coffee industry also typically acts as a cata-
lyst for domestic economic activity with the cre-
ation of significant levels of direct and indirect
employment and generation of vital tax revenues.
The coffee sector in Colombia, for example, ac-
counts for 6 to 7 percent of its GDP and directly
employs about 10 percent of the population. The
debt crisis in many of these countries, coupled with
weak prices for sugar and key mineral exports, has
only heightened the need for coffee revenues for
test. While the pact has a reputation for being
fairly successful in defending floor prices, it re-
mains to be seen if the pact can stem the increase in
prices for the sake of consumer member nations.
After the Brazilian freeze of 1975, coffee prices
rose from under $1 a pound to over $3 a pound.
The ICO is also being challenged over the issues of
quota flexibility, quota undershipments, and dis-
count pricing to nonmembers of the agreement.
During the last two years, some exporting members
Trends in Coffee Prices, 1970-85a
I I I I I I I I I I I I I I I I
0 1970 75 80 85
I Average month;y coffee price for other mild arabicas-a type of
coffee exported by Mexico and Central American countries.
of the ICO fell substantially short of filling 25
percent of their export quotas during each of the
first and second quarters of the quota years as
required by provisions of the ICO. Although these
countries have always met their quotas by the end
of the year, these quota undershipments during the
first half of the year deprived consumers of an
orderly flow of coffee and contributed to price
instability. Undershipments were particularly trou-
blesome because they occurred while some export-
ing members were shipping to nonmembers of the
ICO at substantially reduced prices.
Given these issues, attention is now being focused
on whether the recent increases in quotas will be
met or whether producers will withhold coffee in
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Secret
could further undermine the agreement in the eyes
of consumer nations. This comes at a time when
Washington is reviewing its participation in the
coffee agreement and must decide whether to ask
Congress to extend enabling legislation beyond
September 1986.
Longer Term Outlook
While the market is experiencing considerable
strength in futures prices, the recent price surge
would be mild to what could occur if Brazil's next
coffee crop were to experience frost damage during
the upcoming winter season (June-August). Such
damage could send prices skyrocketing, especially
in light of expected drawdowns in stocks to meet
the current shortfall. If, on the other hand, Brazil
passes through the frost season unscathed and other
major producers have good crops entering the
market next year, prices could return to more
normal levels of under $1.40 a pound.
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Secret
Uruguay: Dim Prospects for
Economic Recovery
Julio Maria Sanguinetti, Uruguay's President since
March, is counting on further liberalization of the
basically free market economy to ease foreign debt
difficulties as well as address popular demands for
economic improvement. Progress in this area has
enabled Montevideo to reach agreement with the
IMF and its commercial creditors, but a domestic
economic turnaround has not yet materialized. We
believe that after five straight years of economic
decline, labor, business, the opposition, and the
military will demand that Sanguinetti reconsider
the free market program in 1986. In our judgment,
this domestic pressure and weakening exports will
endanger compliance with the IMF program and
threaten the overall financial rescue package.
Sanguinetti's Inheritance
Uruguay is heavily dependent on commodity ex-
ports and its public sector as engines of growth. The
economic expansion of the 1970s has been blunted
since 1981 by world recession, weak domestic
demand, and deteriorating economic conditions in
Brazil and Argentina, which purchase 20 percent of
Uruguayan exports and are major sources of for-
eign capital. Simultaneously, inflation has been
driven up by the Central Bank's need to print
money to cover a yawning public-sector deficit.
Between 1981 and 1984:
? GDP fell about 16 percent, with the manufactur-
ing and construction sectors registering the larg-
est declines.
? Unemployment increased to 14 percent, causing
growing emigration of young, educated workers,
according to the US Embassy.
? Inflation tripled, causing a 30-percent drop in
real wages.
Persistent current account deficits have forced
sharp cuts in imports. Falling world prices for wool,
Uruguay: Real GDP by Sector, 1984
Agriculture
beef, and textiles, however, have led to a declining
trade surplus while interest payments were rising.
A substantial loss of official foreign reserves result-
ed, according to the US Embassy, as foreign
creditors suspended new financial support when the
IMF discontinued disbursements on Uruguay's
standby in December 1983.
Montevideo tried without success to nego-
tiate a new IMF agreement in 1984, and commer-
cial banks confined their financial assistance to
rollover of maturing debt.
Secret
DI IEEW 86-001
3 January 1986
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Uruguay: Selected Economic
Indicators, 1982-86
Real GDP Growth
Percent
Unemployment Rate
Percent
Consumer Price Growth
Percent
Real Wages
Index: 1982=100
Monetary Expansion
Percent
Public Sector Deficit
Percent of GDP
a Estimated.
b Projected.
Sanguinetti's economic ministers favor a market-
oriented approach to fueling domestic economic
recovery and improving the external accounts. The
US Embassy reports that Economy and Finance
Minister Zerbino, domestic economic policy czar,
supports competitive exchange rates to stimulate
export-led growth and cuts in government spending
and improved tax collection to reduce inflation.
Uruguay's economic leadership also believes that
paying the external debt is integral to its recovery
program and to regaining access to new develop-
ment credit. According to press reports, Minister of
Foreign Affairs Iglesias, the secretary pro tem of
the Cartagena Group of Latin American debtors
has publicly called for political solutions to ease the
repayment burden but does not advocate a debtors'
cartel or debt repudiation.
Montevideo has moved quickly to shore up its
precarious payments position. Since April, Zerbino
has sought to conclude negotiations with the IMF
and creditor banks for a multiyear rescheduling of
the external debt and $270 million in new funds.
The financial assistance package signed at the end
of September includes $120 million in IMF funds
over 18 months as well as $150 million in new
loans. Creditors also granted a graduated repay-
ment schedule with lower interest rates and a three-
year grace period. In turn, Montevideo promised
the Fund that it would reduce its inflation rate to a
45-percent annual rate for 1986, maintain a float-
ing exchange rate to improve exports, and reduce
the fiscal deficit to 5 percent of GDP by December
1986. the program
aims to boost GDP growth to 2 to 4 percent next
year. 25X1
The export sector has received the greatest initial
attention. According to the US Embassy, peso
depreciation has kept pace with domestic inflation,
stabilizing export competitiveness. Exporters also
benefit from reimbursement of indirect taxes, duty-
free import of components and raw materials for
reexport, and subsidized export credits. A new
trade agreement with Buenos Aires allows for
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increased exports of selected agricultural and in-
dustrial goods and for expanded Argentine techni-
cal assistance in improving oilseed production. Bra-
zil has agreed to increase imports of Uruguayan
agricultural products and cemented the deal with a
purchase of 20,000 metric tons of beef.
spur 4-percent growth in agricultural production,
we believe that Uruguay's economy will contract
for the sixth consecutive year. Consequently, we
believe that unemployment will end the year at
about 14 percent while we predict only a slight
decline in inflation from the 1984 level.
Similarly, Montevideo is also reshaping domestic
spending priorities to balance creditor requirements
against popular concerns. According to press re-
ports, Sanguinetti is moving to reduce the budget
deficit by holding the central government's overall
expenditures constant, increasing revenues from
the value-added tax, and implementing strict new
tax collection procedures. State enterprises are to
reduce personnel and streamline their operations,
health programs.
To bolster
living standards, the government will rechannel
funds into social programs at the expense of the
defense budget, while additional social service
spending will be funded by higher taxes. For
example, the Senate recently approved new inheri-
tance, excise, and customs taxes, the proceeds from
which will be allotted to fund new education and
Economic Recovery Languishes
In addition, according to the US Embassy, Uru-
guay is still battling external cash strains. As of
October, exports from Uruguay were down 13
percent from last year's level of $925 million,
we a ieve 1985
imports were down 11 percent, but the trade sur-
plus still fell short of the $369 million in interest
payments.
Against his initial bold promises to get the economy
moving, Sanguinetti's lackluster record is weaken-
ing his popularity. US Embassy reporting indicates
that the share of the populace rating Sanguinetti's
performance as good or very good dropped from 60
percent in June to 39 percent in July. According to
a Gallup poll in October, 56 percent of Uruguayans
indicated dissatisfaction with the government's ef-
the economy registered a 3-percent drop in
GDP in the first nine months of 1985-a much
forts to confront the economic crisis.
more pessimistic figure than that given the IMF. Rough Sledding Ahead
Although real wages have risen 12.5 percent, im-
proved public finances enabled the Central Bank to With tough debt negotiations behind him and labor
reduce the rate of monetary expansion, making disputes easing, Sanguinetti has an opportunity to
credit scarce and expensive. Additionally, recovery revive the economy. Continuation of his cautious
is being restrained by weak consumer demand, lack approach, potential benefits from the new trade
of industrial investments, falling exports, and, ac- agreements, and the passage of legislation to ease
cording to the financial press, depressed construc-
tion activity. Although good weather will probably
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Uruguay: Current Account Trends, 1982-86
1,023
1,087
a Projected.
b Estimated.
c The ratio of interest payments to export earnings.
1983 1984 1985 a 1986b
industry's debt situation could result in a return to
modest economic growth. We doubt, however, that
Montevideo will be able to keep the social consen-
sus needed to engineer a recovery, and as a result
we believe that Uruguay's economy will continue to
decline. Traditionally, labor remains quiet through
April as workers enjoy summer vacations, but the
lack of an economic turnaround will probably spark
the return by midyear of disruptive strike activity
and calls to suspend debt repayments. Sanguinetti's
political opponents will probably also try to gain
ground by calling for growth-oriented policies,
while military officials will probably lobby for
increased defense spending. We expect private
businessmen to continue to demand an easing of
their huge debt burdens, which were brought on by
falling demand and lack of investment. In addition,
as businesses fail, the Central Bank will face
demands for financial bailouts, which would en-
large the fiscal deficit and threaten the achieve-
ment of IMF targets.
Under such conditions, there is a serious risk that
Uruguay's foreign financial rescue program could
unravel this year.
exports will probably decline again, as falling world
prices bite into commodity export earnings and
developed countries limit their purchases of textile
products. Consequently, we expect that Montevideo
will again fall out of compliance with its Fund
program and that commercial bank creditors will
remain unwilling to disburse funds already commit-
ted. The ensuing payments squeeze will probably
threaten Montevideo's ability to meet regular inter-
est payments and its ability to import.
Implications for the United States
We believe that economic uncertainties in Montevi-
deo will create friction in commercial relations with
the United States. Driven by the need to export,
Uruguayan complaints of protectionism are likely
to intensify. Poor economic performance will pro-
vide ample grounds for labor to intensify its attack
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Frustrated by 10 years offalling real wages and
growing unemployment, Uruguayan labor has
grown militant in the country's freer political
climate. Workers have taken advantage of their
newly won rights to organize and strike by forming
223 new unions and staging over 200 strikes and
work stoppages since Sanguinetti took office last
March. These work stoppages, in turn, have dis-
rupted normal commercial activity, contributing to
the large drop in Uruguay's exports. In addition,
labor's ability to obtain real wage increases has
worked at cross purposes with government efforts
to reduce inflation.
Union leaders, largely left leaning, also take an
antagonistic view of the government's economic
strategy, and some unions have called on Sanguin-
etti to bypass the IMF and repudiate the foreign
debt. According to the US Embassy, however,
civilian politicians are losing patience with labor.
The government has tried to engineer a social pact
with labor, but also showed a strong hand in
ending the six-week strike of national railroad
workers last September. When union leaders re-
fused to accept management's salary proposal, the
government broke off wage talks, and, in a climate
of weak public support for the strike, forced a
return to work.
Although this tougher approach has caused labor
to become relatively quiet since September, we
believe that workers will again begin to voice
demands for greater benefits and a larger role in
public policy making. Given labor's strong link to
the opposition, work disruptions and political pro-
tests could again erupt this year, impeding eco-
nomic stabilization and testing military support
for democratic government.
on Sanguinetti's debt policy and probably will
renew appeals to Washington for short-term finan-
cial assistance. A perception that the United States
was unresponsive and unsympathetic to Uruguay's
plight would encourage Sanguinetti to support a
more confrontational posture by the Cartagena
Group. Should Montevideo declare a payments
standstill it would likely impose tighter exchange
controls and new import barriers.
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Venture Capital:
Heightened Foreign Interest
tive for funding risky ventures.
Foreign governments and industry, captured by the
successful US example, are looking to venture
capital to facilitate innovation. Although such mar-
kets-particularly in the United Kingdom, the
Netherlands, and Japan-have expanded rapidly in
the past few years, they remain relatively small and
dominated by conservative financial institutions.
Despite government and industry efforts to pro-
mote venture capital, many barriers will continue
to inhibit the development of robust markets
abroad. Foreign firms are investing substantial
amounts in the active US venture capital market to
gain access to new technological developments be-
cause of limited domestic opportunities. Nonethe-
less, we believe that the close relationship between
industry and financial institutions in Japan and
Western Europe may serve as an effective alterna-
Foreign Venture Capital Markets
A variety of Japanese and West European govern-
ment and industry studies pinpoint ready access to
venture capital as a significant US competitive
advantage. These studies indicate that the large
and active US venture capital market-by provid-
ing significant amounts of funds to innovative,
high-technology startup companies-has encour-
aged major technological advances. The realization
that venture capital can promote commercializa-
tion of new technologies has convinced Japanese
and European leaders that a strong venture capital
market will add to the competitiveness of high
technology as well as traditional industries
Venture capital investments in Japan and Western
Europe, virtually nonexistent until the early 1980s,
have grown rapidly:
? In Japan, there are 62 venture capital firms, over
three times the number that existed in 1982. Only
22 percent of Japan's startups, however, receive
funds from venture capitalists.
Defining Venture Capital
Despite its general usage, the term venture capital
can have several distinct meanings. In a broad sense,
it refers to capital available for high-risk investment
opportunities with high earnings potential. This defi-
nition covers all high-risk, high potential invest-
ments, regardless of the origin of the funds, the way
they are allocated, or used. Funds allocated by an
investment pool for the purchase of oil exploration
blocks, for instance, come within this definition of
venture capital. In a narrower sense, it refers to
capital committed, as equity, for the formation and
setting up of small firms specializing in new ideas or
new technologies. However, venture capital compa-
nies also look for significant amounts of loan capital.
Furthermore, venture capitalism is not solely the
injection offunds into a new firm. It also includes sthe
input of the skills necessary to organize and manage
the firm.
? UK venture capital firms have provided over 60
percent of the European total.
? Italy and France have small venture capital
markets, with investments of about $100 million
each.
Much of these funds, however, are currently being
channeled to US ventures. Indeed, nearly 20 per-
cent ($3 billion) of US venture capital comes from
foreign sources.
The sources of venture capital in Japan and West-
ern Europe are similar, but both differ significantly
from sources in the United States. The majority of
Japanese venture capital-primarily in the form of
Secret
DI IEEW 86-001
3 January 1986
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Venture Capital: Relative Market Sizes
Million US $
Number of
Professional Venture
Capital Firms
1982
1984
1982
1984
United Kingdom
500a
2,629
36
99
Netherlands
110a
526
NA
33 b
Japan
86
440
18
62
West Germany
120 a,
225
NA
30
Italy
NA
122
NA
7
France
NA
114
16
30
United States
7,600
16,300
350
500
a Estimated.
b Includes only officially recognized venture captial firms.
debt-originates from the large city banks, securi-
ties companies, and, to a lesser extent, insurance
and trading companies. In Europe, banks and
corporate investors also make up the primary
sources, generally providing loans rather than equi-
ty capital. In contrast, US venture capital comes
mainly from pension funds-more than one-third
of the total-with foreign and private investors,
along with corporations, providing smaller, but
roughly equal, amounts.
Because conservative financial institutions domi-
nate foreign venture capital markets, the actual
level of funds channeled to high-risk ventures is
limited. Only about 10 percent of Japanese and 20
percent of European venture capital actually goes
to firms just starting up, as compared with about
40 percent in the United States. While US inves-
tors accept high risk as a trade-off for potentially
large capital gains when a startup company goes
public, Japanese and European venture capitalists
are more interested in providing limited funds to
established firms likely to become future borrowers
or to provide capital gains more quickly. In Japan,
for example, the volume of loans from venture
capital firms to businesses outweighs similar equity
investments by more than 4 to 1. Similarly, foreign
securities firms provide funds to ventures that are
close to public listing to gain the underwriting
business. Foreign investment in US ventures, how-
ever, is more extensive because of the desire to
acquire US technologies.
Continuing Barriers to Growth
Several factors continue to inhibit the development
of active markets abroad:
? Underdeveloped stock exchanges and the lack of
secondary markets are particularly constraining.
Because most investors expect to obtain their
return by selling their investment shares to earn a
capital gain, the availability of an active stock
exchange is a necessity. Moreover, secondary
markets such as NASDAQ in the United States
are needed to provide markets with less stringent
listing requirements for the small high-risk firms.
As long as banks dominate corporate financing in
Japan and Europe, chances of developing full-
fledged equity markets quickly are limited.
? A lack of experienced management reduces the
attractiveness of new ventures. A recent Japanese
survey found 90 percent of venture businesses felt
a lack of skilled management was a major prob-
lem. In addition, Japanese antimonopoly laws
prohibit venture capitalists from actively partici-
pating in firms they invest in, further limiting a
company's access to skilled management.
? A weaker tradition of entrepreneurship results in
low demand for venture capital. Because Japa-
nese and Europeans prefer the security of lifetime
employment with an established company, signif-
icantly fewer startup companies appear. More-
over, aversion to high-risk investments continues
to permeate Japanese and European culture with
strong social biases against persons associated
with failed businesses-the inevitable fate of
many startup firms.
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Venture Capital: Sources and Uses, 1984
United States
Pension funds 34
Others 6
Private investors 15
Foreign investors 18
Western Europe
Banks 32
Other 7
Pension funds 10
Private investors 13
Corporations 21
Western Europe
Computers 19
Biotechnology 4
Communications 5 -
Industrial automation 9
Electronics 11
Banks 35
Other 10
Private investors 10
Corporations 15 -
a Including endowments and foundations.
b Including genetics, energy, and retailing.
c Including chemicals, agriculture, and retailing.
d Including biotechnology, energy, and marketing.
United States
Computers 32
Otherb 15-
Electronics 24
Others 11 -
Precision machinery 10
Information and -
telecommunications 11
Mechatronics 16
Software 19
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In addition, US tax laws provide better opportuni-
ties to shelter income through high-risk ventures.
For example, the provisions for writing off capital
gains have, until recently, been more generous than
in Western Europe and Japan. The United States
also has special legislation to encourage investment
in particular sectors, such as synfuels in the 1970s.
In an effort to overcome these obstacles and chan-
nel funds into high-risk companies, foreign govern-
ments and industries are actively promoting poli-
cies to expand the use of venture capital. These
measures, usually patterned after practices in the
United States, are aimed primarily at reducing the
capital gains tax and at promoting the development
of secondary stock markets. Japanese Government
promotion efforts include:
? Relaxing the criteria for listing companies on the
over-the-counter stock exchange in 1983 to facili-
tate venture businesses going public.
? Establishing the Venture Enterprise Center
(VEC) that helps businesses strengthen their
R&D efforts by guaranteeing 80 percent of loans
up to 100 million yen, currently about $500,000.
? Providing loans through MITI and the Japan
Development Bank (JDB) at below market fi-
nancing with long-term repayment periods for
new projects. The JDB's charter was recently
amended to allow it greater involvement in the
venture capital arena by increasing the level of
low-cost funding available to high-tech
companies.
? Current legislation submitted by MITI called the
Venture Business Promotion Law, which includes
tax-free reserves for R&D and for investment
losses if a venture fails.
In addition, many local governments and prefec-
tures are offering various incentives, such as low
property taxes and preferential loans for venture
businesses because of their employment and reve-
nue potential.
A number of limited actions have been taken by the
European Community (EC) to spur the region's use
of venture capital. Last March, for example, the
European Commission announced the availability
of $800,000 for venture capital investments in
small- and medium-sized businesses. The European
Commission has also established Euromtech, a
public/private venture capital fund, which will
provide about $14 million for venture projects in
the EC. In addition, privately funded groups, such
as the European Venture Capital Association
(EVCA) and Euroventures, have been established
by businessmen and venture capital firms to ensure
a smooth flow of information on venture capital
developments and to provide advice to the Europe-
an Commission on ways to expand its use.
Individual European countries are also implement-
ing measures to encourage the use of venture
capital:
? The United Kingdom established the Unlisted
Securities Market in 1980. In 1983, the Business
Expansion Scheme was introduced that offers
private investors special tax incentives up to
$53,000 a year for investments in new companies.
In addition, the Bank of England has partial
ownership in Investors in Industry-Britain's
largest venture capital firm-which provides a
direct channel for government funds for industry.
? The Dutch Government guarantees up to 50
percent of the losses incurred on individual invest-
ments by recognized venture capital firms and
established a government-backed equity fund,
MIP, in 1982, to offer equity to firms involved in
high-risk ventures. The MIP now provides nearly
one-fourth of all Dutch venture capital. The
government also has established a secondary
stock market similar to that in Britain to provide
further startup incentives.
? The West German Senat Innovation Fund, estab-
lished in 1982, has provided about $10 million to
startup firms. In addition, a subsidy program
worth about $25 million began funding technol-
ogy ventures this year. In 1986 West German
venture capital firms will also get special tax
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breaks if they raise money on German stock
exchanges and invest it in at least 10 firms. Due
to local incentives, about half of West Germany's
venture funds are invested in Berlin.
? France has provided special tax incentives to
investors, including a lower capital gains rate for
individual investors and the creation of a second-
ary market with flexible listing requirements for
new firms. In addition, the Industrial Develop-
ment Institute has provided nearly $4 million for
venture capital promotion, and the Directorate of
Telecommunications has established a $2.5 mil-
lion joint venture with Sofinnova-a state-owned
venture capital firm-to provide equity capital to
small firms in the telecommunications sector.
Japanese and West European-especially West
German-firms have also established their own
venture capital subsidiaries to allow small pools of
personnel to resign and establish spinoff firms to
commercialize products which do not fit into cur-
rent corporate activities. A group of Siemens per-
sonnel, for example, recently established ICT, a
semiconductor testing company. In return for fi-
nancing, ICT will give Siemens access to its tech-
nology developments.
Targeting US Technology
Foreign corporations are using venture capital as a
method to acquire US technologies-targeting ar-
eas such as computers, software, and biotechnolo-
gy. Because foreign companies often lack the ana-
lytic skills in assessing venture opportunities, they
usually use US venture capital firms as middlemen.
Japanese trading companies are increasingly form-
ing syndicates to raise domestic venture capital
funds for investment in the United States
Examples of recent technology acquisi-
? A $100 million venture capital partnership be-
tween CIT-Alcatel and a US firm in late 1984,
giving the French concern access to a wide range
of emerging electronics technologies.
? A United Kingdom electronics firm, Thorn EMI,
has allocated $5 million for venture capital in-
vestment in the United States to acquire comput-
er and computer-related technology.
? Olivetti, the Italian electronics giant, has invested
about $60 million in nearly 30 US venture busi-
nesses. Besides gaining access to US technology,
it hopes to use these US firms as outlets for its
products.
? Kyocera of Japan has established a venture capi-
tal firm in the United States
Major barriers, such as national tax and financial
systems, will continue to inhibit the development of
venture capital markets in Japan and Western
Europe.' Corporate reliance on large banks for
finance and the aversion of European and Japanese
investors to high risk will also continue to limit the
development of true venture markets. Although the
recent liberalization of Japanese financial markets
has alleviated some entry restrictions, changes re-
main slow and cumbersome. In addition, unless the
EC can unify many of its financial and regulatory
practices, the development of venture capital on the
continent will be slow during the net decade.
Despite foreign perceptions, we believe the extent
of the US competitive advantage from venture
capital may be offset by other factors. US industry
executives and analysts point to the ability of the
financial systems in Japan, France, and West Ger-
many to provide low-cost funds to domestic compa-
nies and to their firms' ability to carry high debt
' We believe the UK venture capital market, however, will continue
to deepen because of its developed financial markets and greater
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levels. As a result, the risk of financing long-term
R&D projects is greatly reduced. Moreover, gov-
ernment R&D programs in Japan and Western
Europe provide significant financial and technical
support to developing new technologies
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Secret
French Fighter Exports:
Limited Prospects
France continues to lose export customers for its jet
fighter aircraft. Many former French clients are
buying US planes, and, we believe, a variety of
political, economic, and military factors will fur-
ther reduce France's share of the non-Communist
fighter market in the 1990s by more than half.
Declining sales are likely to weaken the financial
condition of France's military aircraft industry,
increase procurement costs for the French Air
Force, and probably reduce the number of fighters
France can buy for its own forces.
Losing Ground to the United States
France has long been dependent on foreign sales of
jet combat aircraft to make its own purchases
affordable and to ensure the financial viability of
Avions Marcel Dassault, a major component of its
aerospace industry. French sales represented about
7 percent of the non-Communist fighter export
market during 1974-83; the United States held
about 34 percent of the market. With a 2-to-1
margin over domestic sales, exports have reduced
per-plane costs and helped France to recoup its
development costs, thus enabling France to remain
the only European state independently designing
and producing high-performance fighters. Das-
sault, the manufacturer of Mirages, depends on
military contracts for 90 percent of its revenues,
and on exports for about 70 percent of its income,
Moreover, the
arms exports over the last 10 years.
siles, munitions, and ground support equipment by
other French firms. We estimate that aircraft and
aircraft-associated sales have accounted for at least
one-third of the roughly $35 billion in France's
sale of aircraft has created a large market for the
sale of associated equipment, such as radars, mis-
Since the late 1970s, French fighter aircraft ex-
ports have steadily lost ground to US fighters,
particularly the F-16 and the F-18. French fighters
have a reputation for being less sophisticated. The
Mirage-2000, for example, suffered development
problems, and early versions received an inferior
engine that degraded the plane's speed and maneu-
verability. In addition, the Mirage-2000 has not yet
been used in combat.
Losing the Replacement Market
Because of their advancing age, most of the
Mirage-111/5/50s will need replacement by the
mid-1990s as they approach the end of their 20- to
25-year service life. France is working hard to win
these replacement sales: its Rafale fighter, sched-
uled for introduction in the mid-1990s, is being
designed as a lightweight, relatively less sophisti-
cated ground attack plane, aimed particularly at
Third World customers. About 300 Rafales will be
produced for the French Air Force.
Despite these efforts, many customers have already
begun to replace their older Mirages with US
planes: Australia has bought F-18s and Belgium
Secret
DI IEEW 86-001
3 January 1986
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Secret
France: Sales of Mirage Aircraft, 1958-85 a
106
21
South Africa 55 48
Spain 30 72
Switzerland 55
a Since the mid-1970s the United States has exported 1,077 F-16s
and 285 F-18s to 17 countries.
has purchased F-16s, for example. France has also
lost-and we believe will continue to lose-a num-
ber of other large customers:
? Paris has denied itself several potentially lucra-
tive markets. For example, France no longer sells
aircraft to Israel and will not sell aircraft to
Libya while Libyan forces are in Chad. Paris also
observes the UN embargo on arms sales to South
Africa.
? Several Third World customers probably cannot
afford new planes because of tight defense bud-
gets and large foreign debt burdens. Argentina,
which lost a number of Mirages in the Falklands
war, and Zaire are two customers that we believe
will find it nearly impossible to purchase any new
aircraft. Peru has already announced a cut in its
Mirage-2000 order from 26 to 13, and press
reports indicate that France's reluctance to ac-
commodate Saudi Arabia's wish to pay with oil
instead of cash contributed to Riyadh's decision
to buy Tornados from the United Kingdom in-
stead of 40 to 45 Mirage-2000s.
? Some air forces-the Swiss Air Force, for exam-
ple-are upgrading, rather than replacing, their
older Mirages. Switzerland probably will not
purchase new aircraft until the mid-1990s, and
then only after a long, open competition.
their purchase of replacement a-ir-maTE.
delaying
? Other customers have become involved in aircraft
production programs of their own. Spain has
joined the European Fighter Aircraft (EFA)
group. Production of EFA-scheduled to begin in
the early 1990s-combined with Spain's F- 18
purchase will satisfy Madrid's aircraft needs into
the next century.
? The increasing availability of Third World-
oriented attack aircraft has cut into the Mirage
markets. Customers may choose from the
Brazilian-Italian AMX, the British Hawk, or the
Spanish CASA-101. These aircraft provide
cheaper alternatives to high-performance air-
craft, such as the Rafale, and are able to fill
many of the same roles.
Altogether, we estimate that France has already
lost 741 Mirage replacement sales.
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planes, such as Pakistan, and some major US
customers of the past, such as Saudi Arabia,
Jordan, and possibly Iran.
France's reduced market share will still leave it as
Western Europe's dominant exporter of fighter
aircraft in the 1990s. France's aggressive market-
ing and offers of offset purchases and liberal
financing can be expected to bring some new
contracts. We believe that France will also continue
to supply advanced aircraft to customers such as
Egypt, Greece, and India that are also seeking to
diversify their arms sources.
to
prod the USSR into selling MIG-29s on favorable
terms. When Moscow agreed, New Delhi dropped
its option to build another 110 Mirages.
Political considerations and diversification policies
in the Third World may enable France to sell
almost 100 more Mirage-2000s within the next 18
months. For example:
? Morocco may buy 30 to 40 Mirages if the United
States does not approve the F-16 sale,
? Algeria is interest-
ed in buying 20 strike versions with an option for
20 more.
While projections of the world fighter market in
1995-2000 are inherently uncertain, the Rafale is
likely to garner the vast majority of West European
fighter exports. Its main competitor, EFA, will be
larger, more expensive, and geared to air combat in
Europe rather than for Third World conditions.
Rafale will also be competitive among the Mirage
clients that have not switched entirely to US
Implications for the
French Defense Industry
Declining French fighter exports will place new
strains on the French defense industry and French
military capabilities. Without large exports, the
profitability of the French fighter industry and
Dassault will be threatened. France may also face
the politically unappealing need to cut aerospace
jobs. In addition, the unit price of Dassault's
products probably will rise dramatically-we esti-
mate that each Mirage-2000 already costs $25
million, and Rafale has a current estimated price
tag of at least $30 million. We believe increased
unit costs probably will force a reduction in French
Air Force procurements. Embassy reporting indi-
cates that France may already be considering an
early end to Mirage-2000 production to save money
to invest in the Rafale and, possibly, to avoid
cutting into Rafale's exports. A cutback in the
Mirage-2000 would reduce the strength and effec-
tiveness of the French Air Force in a European
conflict, at least until the Rafale enters service in 25X1
1995. New Rafales will make up only part of 25X1
France's lost capabilities, however, because they 25X1
are not primarily designed for European combat.
25X1
2bA-i
France may also be forced to rethink its dedication
to independent fighter procurement and participate
in the effort to reduce Europe's defense costs
through defense industrial cooperation. This pro-
cess may already be beginning: in November 1985,
France rejoined the EFA consortium and offered to
accept a largely symbolic 5- to 10-percent share of
the project's work. We believe the French decision
was motivated, at least in part, by a desire to retain
access to European aerospace markets and to gain a
share of EFA's future export revenues. Beyond the
year 2000, with France's own costs rising and
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exports dropping, Paris may be forced to become a
full partner with Britain, Germany, and the other
NATO members in multinational fighter projects.
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Secret
Energy
Progress on Second Riyadh has evidently approved installation of the most difficult portions of the
Iraqi-Saudi Pipeline 800-km second phase of Iraq's oil export pipeline through Saudi Arabia. The
project will be delayed if the sections are not started soon. Work has already
begun in Iraq on a new pumping station for the line.
tenders for construc-
tion of the remaining Saudi portions are not expected before this spring.
Completion of the second-phase pipeline and new loading facilities on the Red
Sea coast of Saudi Arabia will probably take at least two years after the
contract is tendered and will raise Iraq's oil export capacity by about
1 million b/d.
Iraq Seeks Western Baghdad has invited US and UK oil companies
Oil Assistance to bid on oil exploration contracts for tracts in northwestern Iraq. Major
Western oil firms have been limited to providing technical support since
Baghdad completed nationalization of its oil industry in 1975. Iraq is
interested in obtaining Western expertise and financing, and may hope that
involving Western oil companies will help secure buyers for its crude. F
Japan Passes Product The first imports of gasoline-under recently approved import legislation-are
Import Legislation scheduled to arrive in Tokyo this month. The bill to liberalize the imports of
gasoline, kerosene, and gas oil was passed on 13 December. The first deliveries
will
be shipped from Canada, Saudi Arabia, South Korea, Singapore, China and
Kuwait. Under MITI guidelines, a refiner's production quota would be
reduced by the amount it imports. Although no quantities were specified in the
law-which will remain in effect until 31 March 1996
refiners plan to import between 21,000 and 28,000 b/d of gasoline
in rester 1986, which equates to about 3 percent of 1985 gasoline
Secret
DI IEEW 86-001
3 January 1986
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Secret
Greek-Soviet Greece is expected to contract early in 1986 for 1 to 2 billion cubic meters
Gas Negotiations (bcm) per year of Soviet natural gas, according to Embassy reporting.
discussions in Moscow last month failed to resolve differences on
price, pipeline construction, and levels of Greek exports to the USS
Prior to its trip
to Moscow, the Greek delegation visited Algiers to discuss the feasibility of
importing about 1 bcm annually of liquified natural gas. Press reports indicate
that the Algerian visit may have been a ploy for the talks in Moscow. The Em-
bassy believes Moscow is pushing to conclude a contract quickly to coordinate
the construction of two pipeline spurs designed to deliver Soviet gas to both
Greece and Turkey.
Soviet Yamburg Construction of the Yamburg-Progress-pipeline for export of Soviet gas to
Pipeline Construction Eastern Europe will begin this month, according to a Soviet announcement.
Bulgaria, Hungary, Czechoslovakia, East Germany, Poland, and Romania will
contribute manpower and equipment in return for 20-22 billion cubic meters of
Soviet gas per year beginning in 1989. Prague announced that Czechoslovakia
will receive 5 billion cubic meters of gas annually for 20 years in exchange for
contributing equipment and 12,000 workers for the construction of 580
kilometers of pipeline, eight compressor stations, and a gas treatment plant in
the Urals. The Soviets may plan to use spare capacity in the pipeline
eventually to increase gas deliveries to Western Europe.
Possible Oil Discovery The Soviets claim to have found oil and gas during recent exploratory drilling
in Barents Sea in the Barents Sea, according to Norway's NATO representative. No foreign
firms were allowed to participate in the exploration, but the Soviets have not
decided whether to allow Western participation in future development and
production in the Barents Sea. This is the first official report of an oil
discovery in the Barents Sea since they began offshore drilling in 1982. Oil
production in the area is unlikely to begin before 1990 even if the Soviets begin
a crash development program and obtain full access to Western technology.
They are unlikely to develop any new gas deposits offshore before the year
2000 because vast untapped gas reserves are available onshore.
Italian Bank Support The Bank of Italy is drafting a statement of support for the debt initiative pro-
for Baker Initiative posed by US Treasury Secretary Baker
Meanwhile, the Italian Banking Association has asked the government to relax
loan regulations and change its income tax policies in order to facilitate
participation by the banks in the initiative; Italian banks are being asked to
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contribute $260 million to the $20 billion package. Many members of the
association would like some kind of government guarantee for the new
commitments, more international oversight of debtor country adjustment
policies, and inclusion of more African nations, as well as the CEMA
countries. Nonetheless, the Italian banks believe the initiative is a necessary
step toward correcting the LDC debt problem. The banking association has
asked that new loans extended under the initiative be considered outside
current ceilings on foreign lending-a request that is likely to be approved by
the Bank of Italy. The banks have also requested that they be allowed to
transfer income to reserves against the foreign credits without incurring tax
liabilities, as is now allowed with domestic loans. Although Rome has yet to
comment on the tax issue, its concern for the LDC debt problem suggests that
a favorable response is likely.
Threat to Yugoslav The US Embassy says Belgrade is preparing to slash domestic interest rates by
IMF Program one-third in violation of its IMF standby agreement. An alternative stabiliza-
tion plan drawn up by the central bank would effectively end compliance with
the IMF target for interest rates higher than the rate of inflation. Talks with
fund officials on this issue are likely to resume in January. A collapse of the
IMF accord would seriously harm Belgrade's prospects for a multiyear
rescheduling agreement with its Western government creditors.
The government's interest rate policy has been heavily criticized by
many Yugoslavs over the past few months for adding to inflation and curbing
growth. Some cabinet members favoring positive real interest rates may hope
an IMF threat to terminate its agreement will strengthen their hand.
Global and Regional Developments
Proposed EC Farm The EC Commission presented a set of guidelines on reform of the Common
Policy Reforms Agricultural Policy to the members' agricultural ministers last month. These
include the need for price cuts to reduce oversupply and for improved
cooperation among the world's major agricultural exporters to lessen trade
frictions. The Commission has also proposed specific measures to reduce
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overproduction of cereal, beef, and dairy products, including a tax on cereal
production that would be used to finance export subsidies. The modest
proposals-aimed at curbing government spending on agriculture-must be
approved by EC members. A firm decision is unlikely before the French
elections in March. The producer's tax on cereals probably will be adopted in
some form, and the EC may decide to push for market-sharing agreements on
grain with the United States and other exporters.
LDCs React Favorably LDC reaction to President Reagan's veto of the Jenkins textile and apparel
To Veto of Textile Bill trade bill has been universally favorable. The LDCs still fear, however, that
mounting pressure from the textile bill's supporters in the United States will
cause Washington to impose tougher restrictions, import quotas, or other
measures to curtail textile imports. The textile-exporting LDCs realize that
the battle is not over, especially in view of rapidly expanding US apparel
imports from non-Multifiber Arrangement countries and see the renegotiation
of the MFA next summer as a crucial test for Washington's future textile
policy.
Japanese Automakers Earlier this month Toyota and Honda separately announced plans for auto
Plan Increased production in Canada in the late 1980s. Toyota will build a plant that will pro-
Production in Canada duce 50,000 autos by 1988. Honda has doubled the planned output of a facility
currently under construction to 80,000 autos by 1989. Honda expects to start
Canadian production in late 1986, manufacturing 30,000 autos in 1987. We
believe both intend to ship Canadian-produced autos to the United States,
Both manufacturers have stated their Canadian production will
have high local content-60-percent North American content is necessary to
allow unrestricted shipments to the United States under the US-Canada auto
pact.
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West Germans Blocking West Germany is vigorously opposing a US COCOM proposal to embargo
US COCOM Proposal certain tunnel- and shaft-boring machines. Two West German companies are
the only non-US suppliers of this equipment, whose deep boring capabilities in
hard rock make it uniquely suited to the construction of strategic bunkers
capable of surviving a nuclear attack. According to the US delegation, it was
readily apparent that the West German delegation had high-level instructions
to kill, or at least delay, the US proposal. Bonn probably is concerned that such
an embargo would set a precedent for embargoing other heavy equipment and
impair West German business with the USSR.
Japanese Develop
Process for Bending
Ceramics
National Developments
Developed Countries
According to the Japanese technical press, researchers at the Government
Industrial Research Institute in Nagoya have, for the first time, bent and
formed ceramics in ways common to metals. The Institute reportedly bent
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pieces of zirconia into rings, choosing this shape because automobile manufac-
turers potentially could use this process to make piston rings. Japan has made
a vigorous effort to develop structural ceramics and associated manufacturing
processes to make automobile engines more fuel efficient. The Japanese
achievements are a dramatic advance in demonstrating the workability of
ceramic materials. Nevertheless, the Japanese are probably far from commer-
cializing the new processes that are slow and require high temperatures, and
thus inherently expensive.
Less Developed Countries
Decline in Argentine Argentina's current wheat crop may fall to less than 9 million metric tons, one-
Wheat Exports third less than the 13 million-ton crop expected as of early November, because
of recent flood damage. Such a drop would leave only 4.5 million tons available
for export-20 percent less than outstanding export commitments
Under standard contract terms, the Argentine
National Grain Board can cut back deliveries to its customers by 10 percent.
Buenos Aires is also trying to deal with the anticipated shortfall by renegotiat-
ing contracts with Brazil, China, Iran, and Peru. Argentina's grain agreement
with the USSR does not cover wheat, and Soviet officials have already shifted
planned December wheat purchases from Argentina to the EC, Australia, and
the United States. Lowered grain export earnings will further complicate
Buenos Aires' efforts to pay interest on its foreign debt, and probably impede
attempts to cut export tax rates to stimulate production in the medium term.
Chile's New Santiago has responded to pressures from foreign creditors to earn more
Export Rebates foreign exchange by approving legislation to widen its export base. The major
incentive, however-a grant to qualifying exporters of 10 percent of the value
of their exported merchandise-appears to violate the GATT subsidies code.
The present size of the program does not pose a major threat to Chile's trading
partners because only $60 million or 1.6 percent of Chile's total exports
qualify; the rebate is limited to goods whose current export value is under $2.5
million; and the subsidy ends when the total value of the rebates reaches $7.5
million. Nevertheless, the measure may lead to significant future Chilean
penetration of some markets among the 360 product categories covered by the
rebates. This could provoke friction with industrialized countries already
facing domestic pressures to restrict imports.
Moroccan Food Price hikes of 7 to 10 percent on flour, milk and coffee, coupled with regional
Problems Mount shortages, are testing consumer patience and frustrating government efforts to
meet IMF-suggested budget. targets. According to the US Embassy, domestic
discontent is likely to worsen this winter as the government attempts to cut
subsidy payments to millers by mandating an increase in the production of
virtually unsubsidized luxury flour and a decrease in production of heavily
subsidized common flour. Luxury flour costs twice as much as common and re-
quires more wheat to produce. Moreover, the government may face a wheat
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supply shortage this winter because of the disruption in US CCC wheat
shipments last spring.
the subsidy reductions sharply increase the risk of food price and
supply disruptions such as those that sparked bloody riots in January 1984.
Tunisian Labor The rank and file in Tunisia's powerful labor movement continue to smart over
Ferment the removal of longtime labor boss Habib Achour by the government in
December and ongoing efforts to curtail union prerogatives. Union-govern-
ment relations reached a crisis in early December over a threatened national
strike and stalled wage negotiations.
If the government is unable to
consolidate control over the unions soon, labor peace may cost Prime Minister
Mzali much more than the 5- to 10-percent wage increase asked for by
Tunisian Education Government plans to restrict access to Tunisia's universities have caused
Reforms student protests and some violence throughout the school system. The decision
was driven by the high cost of education-14 percent of Tunisia's strained
budget. Nevertheless, Prime Minister Mzali's solution threatens to alienate
lower- and middle- class Tunisians who have come to expect free education
and view a university degree as a key to upward mobility. Moreover, dislocated
students are ripe for exploitation by Islamic fundamentalists or more radical
groups. Unrest so far has been concentrated among high school students in
areas with a history of street violence, but the return of students to class this
month could spark more widespread demonstrations.
Partial Devaluation The Syrian Government recently announced that public and private exporters
of the Syrian Pound can now convert foreign currency earned through the export of agricultural
and industrial products back into Syrian pounds at the tourist exchange rate of
8.25 pounds to the dollar. Formerly such conversions were at the parallel rate
of 5.4 pounds per dollar. This partial devaluation is the latest and most
sweeping of a series of moves by Syria's new reform-minded Minister of
Economy and Foreign Trade, Muhammad Imadi. With the black-market rate
of the pound now around 14 to the dollar, however, the move is viewed as too
little and too late and is likely to generate only modest increases in conversions
in the legal market.
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Soviet Winter Grain Despite delays caused by a late grain harvest this fall, the Soviets report
Conditions Favorable farmers have been able to sow about 95 percent of the planned 40 million hect-
ares to winter crops-primarily winter grains. Although the planted area is
about the same as last year's, the winter grain area to which intensive
technology is being applied has expanded from 6 million to 14 million hectares.
Weather data and satellite photography indicate normal to above-normal
precipitation during the fall, vigorous growth, and adequate snow cover in most
areas. This is the best start in four years for the winter grain crop, which nor-
mally accounts for about one-third of the USSR's total grain output.
USSR The Soviet Minister of the Chemical Industry recently announced details of a
"Chemicalization" broad program for the "chemicalization" of the Soviet economy up to the year
Program Announced 2000. Production of plastics and resins, is planned to grow at an average annual
rate of 6.3 percent; chemical fibers, 4.7 percent; fertilizers, 3.6 percent; caustic
soda, 3.2 percent; and household products, 5.7 percent. These data imply an
average annual growth rate of output of about 4 percent for the chemical
industry as a whole in 1986-2000-similar to that of 1981-85. The program
calls for accelerated development of engineering plastics, which can replace
metal in machinery, and of substitutes for food products used in chemical
manufacturing, such as edible oils now used in paints. Meeting the plan may
be realistic for fertilizers and plastics but difficult for fibers in view of recent
performance.
Soviet Poll on A recently released report on a Soviet poll conducted in 1981-82 of citizens'
Standard of Living opinions on living standards indicates that almost 75 percent of those polled
believed they lived better than they did in the 1976-80 period. Moreover, 95
percent of the adult population considered itself "not badly" provided for
materially. The report estimates that 54 percent of all adult citizens felt that
life was working out "well," 44 percent believed that things were going only
"satisfactorily,". and only 2 percent believed that things were going "badly." In
contrast, the report said that 5 to 15 percent of all Americans have "a low de-
gree of satisfaction" with their lives and that the share is growing. Official
concern over popular sentiment has risen considerably since the late 1970s
because of the impact on consumption of the sharp slowdown in economic
growth that began in the mid-,1970s. The results, however, indicate that a
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sizable minority-probably larger than 25 percent given the presumed reluc-
tance to answer official questions candidly-perceived, as far back as the early
1980s, that their standard of living had stagnated for a prolonged period. The
poll-considerated by Soviet authorities to be a landmark survey-was
probably designed not just to ascertain but to shape public opinion.
New CEMA Initiative CEMA premiers met last month in Moscow and adopted an ambitious
program for science and technology cooperation to the year 2000. Soviet
Premier Ryzhkov said that recently established Soviet intersectoral S&T
complexes will coordinate Soviet work on CEMA projects in priority areas and
will be authorized to contract directly with East European counterparts. To
flesh out the program, participants signed a cooperation agreement covering
fiber-optics and automated design systems and established the first multilater-
al science and production association, Interrobot. The new program is the
biggest step toward CEMA integration since 1971. The USSR has pushed the
program in part to further its own industrial modernization goals. Although all
East European countries stand to reap some benefit, the more technically
advanced East Germans, Czechoslovaks, and Hungarians may find that the
price of their commitment-forgone domestic efforts and loss of competitive
advantages within CEMA-may outweigh the gains. The required organiza-
tional and planning changes may substantially increase Moscow's control of
East European policies.
China Looking China's Ministry of Geology and Mineral Resources is making an extensive
for Gold effort to locate new gold reserves. The Ministry wants to double the present
production of 50 tons yearly by the end of the Seventh Five-Year Plan (1986-
90). China's official gold stocks were 12.7 million troy ounces in August. One
recent discovery in Shandong Province appears to be the largest gold deposit in
the country and may increase reserves by as much as one-third. China claims
to rank fourth in world gold reserves and sixth in output. Much of China's gold
production now comes from small mines operated by individuals and collec-
tives. To boost output at these mines, Beijing has doubled the domestic
purchase price of gold to more than $300 an ounce and set aside $50 million to
lend to miners.
Chinese Port Expansion Zhanjiang port, China's seventh largest, has completed six new 10,000-ton
class berths, increasing the port's cargo handling capacity by nearly 20
percent. The expanded facilities are expected to give the port a greater role in
supporting offshore oil exploration activities. A newly installed grain elevator
probably will be used mainly for South China's rice exports. The other ports
with grain elevators-Dalian, Shanghai, and Huangpu-had been receiving
large amounts of imported grains until last year. With bumper corn harvests,
those ports now are handling some grain exports, especially Dalian which has
shipped corn to Japan and the Soviet Union
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